The art of long-term investing is about surviving the short run. It’s risk management 101.
This is a friendly reminder that every investment brings the possibility of gain or loss. But when the market’s rising, and everything is great, it’s easy to become complacent and focus less on the downside.
Every investment has a downside, even if you can’t see it. Random things happen. Being wrong is possible. Markets are always changing, and with it, the riskiness of your portfolio.
Prudent risk management starts with the obvious question: what can go wrong? What’s the downside? Now is a good time as any to reacquaint yourself with it.
Because when the market’s rising, and things are going well, it’s the perfect time to test the survivability of your portfolio and make any needed adjustments. Risk management only works if you prepare in advance.
Don’t just take it from me:
The trick in risk management is in recognizing that normal is not a state of nature, but a state of transition and that trend is not destiny. — Peter Bernstein
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It is crucial to have a strategy in place before problems hit, precisely because no one can accurately predict the future direction of the stock market or economy. — Seth Klarman
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Large losses are forever – in investing, in teenage driving, and in fidelity. If you avoid large losses with a strong defense, the winnings will have every opportunity to take care of themselves. And large losses are almost always caused by trying to get too much by taking too much risk. — Charley Ellis
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At times of shock, converting illiquid assets to cash to build flexibility is very expensive. Finding an umbrella in a rain storm might be impossible or very costly. — Myron Scholes
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I spend a great deal of my personal time trying to figure out one thing, which is, at a given point in time, how should you balance aggressiveness and defensiveness in your portfolio. — Howard Marks
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We try to protect against tail risk: the risk of unlikely but possible events that could be catastrophic. — Seth Klarman
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Risk-taking is an inevitable ingredient in investing, and in life, but never take a risk you do not have to take. — Peter Bernstein
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A hot stock, like a hot stove, should be handled with care. — Benjamin Graham
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The tour we’ve taken through the last century proves that market irrationality of an extreme kind periodically erupts — and compellingly suggests that investors wanting to do well had better learn how to deal with the next outbreak. — Warren Buffett
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You have to say to yourself, “If I’m right, how much am I going to make? If I’m wrong, how much am I going to lose?” That’s the risk/reward ratio. — Peter Lynch
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The future, as I see it, is something to be protected against rather than to exploit. — Benjamin Graham
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Diversification of risk matters not just defensively, but because it maximizes returns as well, because we expose ourselves to all of the opportunities that there may be out there. — Peter Bernstein
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The point is to consider risk control, loss avoidance, at least as important as return. — Howard Marks
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You must always be prepared for the unexpected, including sudden, sharp downward swings in markets and the economy. Whatever adverse scenario you can contemplate, reality can be far worse. — Seth Klarman
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Investment survival has to be achieved in the short run, not on average in the long run. — Howard Marks
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Many years ago, an older partner taught me to distinguish between outcomes that are unlikely and outcomes that are catastrophic. The latter are to be avoided even if the odds on them are tiny. — Peter Bernstein
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The best investors do not target return; they focus first on risk, and only then decide whether the projected return justifies taking each particular risk. — Seth Klarman
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A large advance in the stock market is basically a sign for caution and not a reason for confidence. — Benjamin Graham
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Beating the market by losing less than the market isn’t that comforting. — Joel Greenblatt
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Whenever we consider an investment, we think just as much or more about what can go wrong as about what can go right, and we put the avoidance of losses on a high pedestal. — Howard Marks
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Avoiding round trips and short-term devastation enables you to be around for the long term. — Seth Klarman
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In the end, risk management is about consequences. — Peter Bernstein
Last Call
- No, the Rules of the Game Haven’t Changed – J. Zweig
- Why Financial Manias Persist – A Wealth of Common Sense
- Does Leverage Improve Performance? – Klement on Investing
- Equal vs Market Cap-Weighted Portfolios in Stock Market Crashes – Factor Research
- The Panic Series: 1819 – Investor Amnesia
- Why Funds Die – Morningstar
- The Housing Theory of Everything – Works in Progress
- Todd Simkin: Making Better Decisions (podcast) – Knowledge Project
- Lessons From the Rise and Fall of the Pedestrian Mall – CityLab
- Why the University of Florida Gets a $20m Cut of Gatorade Profits Every Year – The Hustle